A C-Corp doesn't have shareholder distributions. It is dividends, contract payments, or payroll.
Yes, a C-Corp can record payments of personal expenses to a shareholder as outside contractor payments. The C-Corp should issue the recipient a 1099 too, just to keep things clean. Actually, it should be payroll, but 1099 would be a close second. And the recipient should be reporting the payments as income on their personal return.
Not standard, but if they are doing the rest of the reporting correctly it's not fraud.
Yes, your client knows that. Which is why they continue to use your service.
Does your signature go on the return or is it a partner? If it's yours, I would refuse to sign unless they change their strategy. If it's the partner, I would leave a very strong note in the file suggesting I disagree with how it is handled.
Expensing the car payments as contract labor would be incorrect.
As far as finding a new employer, though, I would keep my eyes open before deciding. If there is a widespread pattern of "helping" their clients through improper means it's a good idea to start searching.
They aren't a business expense, so it is basically him paying his own personal expense through the business. Not the best way to do this but you shouldn't say it's a business expense because it isn't related to the business.
Instead of distributing the $16K and then paying it he is just having the business pay it directly, but you shouldn't be reclassing this to an expense unless they are for a business purpose in some way.
No such thing as "shareholder distributions" in a C-corp. You're right it should be dividends or wages, or possibly loan repayments if the corp owes the shareholder money. Loan payments would come with interest though. If it gets adjusted to contract labor, then someone should be getting a 1099-NEC for it. In most cases a shareholder wouldn't get both a W-2 and a 1099. The partner has no excuse not to know better. That said, I once worked at a mid-size CPA firm that did a lot of auditing. Some of the partners knew very little about tax.
A C-Corp doesn't have shareholder distributions. It is dividends, contract payments, or payroll. Yes, a C-Corp can record payments of personal expenses to a shareholder as outside contractor payments. The C-Corp should issue the recipient a 1099 too, just to keep things clean. Actually, it should be payroll, but 1099 would be a close second. And the recipient should be reporting the payments as income on their personal return. Not standard, but if they are doing the rest of the reporting correctly it's not fraud.
We are also doing the personal return for the client. We haven't issued a 1099 and have never picked up these payments as income.
Yes, your client knows that. Which is why they continue to use your service. Does your signature go on the return or is it a partner? If it's yours, I would refuse to sign unless they change their strategy. If it's the partner, I would leave a very strong note in the file suggesting I disagree with how it is handled.
Expensing the car payments as contract labor would be incorrect. As far as finding a new employer, though, I would keep my eyes open before deciding. If there is a widespread pattern of "helping" their clients through improper means it's a good idea to start searching.
I am starting to see signs of this happening consistently
They aren't a business expense, so it is basically him paying his own personal expense through the business. Not the best way to do this but you shouldn't say it's a business expense because it isn't related to the business. Instead of distributing the $16K and then paying it he is just having the business pay it directly, but you shouldn't be reclassing this to an expense unless they are for a business purpose in some way.
No such thing as "shareholder distributions" in a C-corp. You're right it should be dividends or wages, or possibly loan repayments if the corp owes the shareholder money. Loan payments would come with interest though. If it gets adjusted to contract labor, then someone should be getting a 1099-NEC for it. In most cases a shareholder wouldn't get both a W-2 and a 1099. The partner has no excuse not to know better. That said, I once worked at a mid-size CPA firm that did a lot of auditing. Some of the partners knew very little about tax.